Golden wool is an item created by using Golden fleece on a spinning wheel. It can then be used on an unstrung lyre to turn it into a lyre. Golden fleece is originally obtained for free, and after the quest can be bought from Lalli for 1,000 gold each. It is used in Olaf the Bard's trial in the quest The Fremennik Trials to create the lyre needed for the quest, but can be procured later to create additional lyres. Cats can also play with this item like a ball of wool.
It's possible to complete The Fremennik Trials quest without this item by killing Lanzig and/or Freidir in their huts in the south-eastern area of Rellekka. They both drop completed lyres.